Global credit rating agency S&P downgraded Israel's credit rating from A+ to A early Wednesday. The agency's decision, originally scheduled for November 8, was moved up by five weeks due to escalating tensions with Hezbollah, which S&P warned could lead to a prolonged and intense conflict.
The downgrade was decided before Iran’s missile attack on Tuesday, but S&P said the urgency to release the report early stemmed from the increased geopolitical and security risks. "The unscheduled announcement was due to the significant rise in Israel's geopolitical and security risks," the agency wrote in its report.
S&P warned that the ongoing fighting in Gaza and the intensifying conflict on Israel’s northern border, with the possibility of a ground operation in Lebanon, could extend into 2025, posing a risk of retaliatory actions against Israel. As a result, the agency revised its economic growth forecast for Israel, predicting 0% growth in 2024 and 2.2% in 2025.
The agency also forecast a fiscal deficit of 9% of GDP for this year—far above the government’s target of 6.6%—and 6% for next year. Despite the downgrade, S&P acknowledged Israel's commitment to fiscal consolidation, including potential measures like freezing tax brackets and reducing government expenditures to curb the rising debt-to-GDP ratio.
The move by S&P follows a downgrade from Moody’s just days earlier, which lowered Israel’s credit rating by two levels to Baa1, a relatively low rating similar to those of countries like Peru, Kazakhstan and Thailand. Moody’s and S&P had both downgraded Israel’s rating earlier this year, marking the first time either agency had done so since they began rating the country in the late 1990s. Now, both agencies have downgraded Israel again within days, citing the expanding conflict with Hezbollah and Iran.
Fitch, the third major credit rating agency, downgraded Israel’s rating for the first time in recent weeks and is expected to issue another downgrade soon.
Despite the S&P downgrade, Israel’s A rating remains one notch higher than Moody’s, which now places Israel in the B category, grouping it with medium-tier economies.
Accountant General Yahli Rothenberg said the S&P decision reflects the ongoing war, rising geopolitical risks and their fiscal impact. He added that S&P noted Israel's diverse economy and proven ability to recover from crises, alongside its strong balance of payments and significant foreign exchange reserves, which provide a buffer for the economy.
Rothenberg also urged the finance minister and prime minister to focus on providing certainty for investors and approving the 2025 state budget as soon as possible. "The budget must support rebuilding fiscal reserves, maintaining a deficit cap of 4% of GDP and reducing the debt-to-GDP ratio, while encouraging investment in growth drivers, infrastructure and addressing Israel’s security and social needs," he said.
What is a credit rating?
A credit rating assesses the ability of countries, companies or individuals to repay loans in the future. Rating agencies for countries, much like banks for private individuals, evaluate the financial history, equity, asset status and other economic indicators of a nation, as well as the extent of its existing liabilities.
Who cares about this?
Primarily, those who plan to lend money to these countries or invest in them. Rating agencies essentially evaluate the risks involved and the ability of nations to repay loans to their lenders.
What does it mean for investors?
The higher the credit rating of the entity or country being assessed, the lower the yield it needs to offer investors, as it indicates lower risk. For example, those lending to the United States or Germany will demand much lower interest rates than those lending to countries like Peru. For a nation in severe distress, such as Syria or North/South Sudan, it’s doubtful there would be any lenders willing to take the risk at all.
What does this mean in practical terms?
Israel is already paying interest rates of half a percentage point to a full point more on its loans than just a few months ago, and these rates are expected to rise further. These higher interest rates are likely to impact everyone: loans for businesses in Israel will become more expensive, costs that companies will likely pass on to consumers.
Additionally, a government burdened with higher loan costs will have to reduce its spending on public services. As a result, there could be cuts to welfare, healthcare, education and other sectors, affecting citizens as soon as the next budget cycle.
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